Is Financial Fraud Too Complex to Prosecute?

William K. Black, Guest Blogger

This interview with William K. Black (University of Missouri-Kansas City) appeared originally at The Real News Network. Prof. Black describes why the U.S. Department of Justice has failed to prosecute executives at financial institutions that helped to detonate the recent crisis. It is not, Black argues, that the bankers were engaged in “rocket science” too complex to prosecute, but that the lack of prosecutions is “a matter of will and a matter of ideology.” His writings on this and other subjects can be read at New Economic Perspectives.

SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.

Our regular guest on The Real News Network on finance and banking, Bill Black, titled his blog this week “How the Rocket Scientists Aided the Senior Fraudulent Bank Officers”, so much so that our banking regulators at the Department of Justice deemed it too difficult to prosecute the bankers for the 2008 financial crisis.

Here to discuss the rocket scientists, who are they, and how the did they aid the bankers is Bill Black himself.

Joining us from Kansas City, Missouri, Bill is an associate professor of economics and law at the University of Missouri-Kansas City. He’s a white-collar criminologist and former financial regulator and the author of The Best Way to Rob a Bank Is to Own One.

Thank you so much for joining us, Bill.


PERIES: Bill, how are these rocket–well, first I should say, who are these rocket scientists?

BLACK: Well, the rocket scientists are mostly mythical, but this is the latest excuse out of that great excuse factory which is the Department of Justice for why they have failed to prosecute a single senior banker who actually led any of the frauds that caused the financial crisis.

The context was the traditional exit interview of a senior Washington official, in this case Deputy Attorney General James Cole, with Bloomberg. And the idea of this kind of interview is you get to tout your accomplishments and you don’t get asked very tough questions. But Cole did get asked by Bloomberg, so how come you didn’t convict anyone? And Cole’s answer was that it was impossible to get convictions, because the bankers who led the frauds that caused the financial crisis were, and I quote, “rocket science”, unquote. So, apparently everybody in banking who’s at all senior is a rocket scientist.

Now, this is crazy on multiple dimensions. So I actually wrote three columns, one on each dimension of craziness.

The first one is, of course, well, let’s just assume that Cole’s speaking the truth, that the bankers are so smart, so much smarter than the lawyers at the Department of Justice, that there is no way to convict them of even blatant crimes that cause a financial crisis, where we lose $21 trillion in GDP, 10 million American jobs. Right? You might think, if you were a senior Justice Department official, your job would be to warn about that and to say, we must change things so that we can make sure that people can’t become wealthy by committing these kinds of devastating felonies with impunity. But no. Cole gave no such suggestion, no indication that he thought it was a problem at all that the people could get off with complete impunity. And, of course, the Bloomberg reporter never bothered to ask a question like that. So that’s the first dimension [crosstalk]

PERIES: Bill, is part of the reason that the DOJ isn’t able to do these kinds of prosecutions they don’t have enough resources and support to mount a case against the banks?

BLACK: Well, part of the reason they can’t succeed brilliantly is certainly that. But that doesn’t explain why they don’t bring 50 or 100 of these prosecutions. They don’t have the resources to bring thousands of major prosecutions, but they certainly do have the resources to bring some, several hundreds of them. So, no, it’s a matter of will and it’s a matter of ideology. They really, really don’t want to prosecute these folks. And that’s the second dimension of craziness, right?

So what are the three big fraud schemes? One is that the lenders extort the appraisers to inflate the appraisal. Well, I can explain that to regular jurors in about 15 seconds, and they all realize, wait a minute, no honest banker would ever do that, because the true market value of the home is your great protection for the bank against loss. So that’s an easy fraud scheme to explain. And we know that that fraud scheme is pervasive and all the investigations and all the empirical evidence demonstrates that. So that’s certainly not even remotely rocket science.

The second big fraud scam was liar’s loans. And again we have really good numbers on that and we know that no honest lender would make liar’s loans. And we can explain that to a jury within ten or 15 minutes.

PERIES: And what are liar’s loans?

BLACK: Liar’s loans are when you don’t verify, typically, the borrower’s income. Sometimes you don’t also verify the job as well, or even their assets in those circumstances. And the industry’s own studies say that this is an open invitation to fraud, say that the incidence of fraud in such loans is 90 percent. And investigations show that it’s overwhelmingly lenders and their agents who put the lies and liar’s loans. So, again, not only is that not rocket science. I mean, it kind of lacks subtlety to call your loans liar’s loans, you know, as a lender. This one isn’t clever in the least bit.

Because there’s no fraud exorcist, once the loans start out fraudulent, they have to stay fraudulent, and you can’t sell a loan in the secondary market by making a representation in a warranty to the buyer that says, hi, I’m selling you fraudulent loans. So that means if you’re going to sell to the secondary market–and roughly 95 percent of these fraudulent loans were sold to the secondary market–then the only way you can do that is through a fraudulent representation and warranty. And we have particularly good data from Clayton on the frequency, and it’s roughly half [snip] all the loans being sold were sold through fraudulent representations and warranties.

Now, you are taught in America how to do a percentage, typically in fifth grade. So that’s about the math level you need as a prosecutor.

PERIES: And in addition to that, Bill, they have access to experts like you who could be brought in to explain these and use you in terms of the trials themselves.

BLACK: Indeed they do. And, in fact, the rocket scientists would actually be useful witnesses for the prosecution, because in most cases their warnings were deliberately ignored, and they were excluded from the key meetings, and they were even fired when they did the right thing, by the senior officers that were leading the frauds. So instead of being a big scary thing, the rocket scientists would actually be part of a successful prosecution case. And that’s the third dimension of crazy.

So it turns out rocket scientists–but what that means, really, is people with really, really strong mathematics skills. So we’re talking about people with PhDs in mathematics or in physics, because physics has such heavy math skills these days. Those folks were never the CEOs of the big banks, and they were almost never the CFOs, the chief financial officers of the big banks. A typical highest position they would get to is the chief risk officer. So, first rocket scientists were not running these places. And the key isn’t to prosecute these math whizzes. It’s to prosecute the CEOs, the chief financial officers, and the people in the boards of directors, and the chief lending officers, folks like that. That’s who we want prosecutions of.

And as I’ve said, in many cases, as I’ve explained, the quants, the quantitatively skilled people, which is a tiny segment of bankers, would actually be star witnesses for the prosecution, saying, yes, I warned the CEO that this could have disastrous consequences. And what happened then? Well, then I was fired. You know? It would be a really good case for the prosecution. And that happened to several cases. In other cases they were simply ignored or shoved to the side and kept out of the loop on important decisions. In all of those cases, they would be useful witnesses. So, again, this is a complete fiction created about these so-called math whizzes. And why anyone would be intimidated by the math whizzes [snip] after all, they get the total crisis completely wrong.

PERIES: Bill, normally in a democratic society one of the pillars that would hold the DOJ accountable is the media here. And you mentioned that Bloomberg did ask one tough question. But have they played their role in terms of the prosecutions that need to come about?

BLACK: Yeah, I wouldn’t exactly call it a tough question. But there was no follow-up, of course, to an insane answer. But that’s–you know, at least they left it as just an obvious clunker and didn’t try to give them an excuse for correcting such a silly excuse.

PERIES: So if the media is not playing its role, normally in these kinds of situations, for example, in the environmental sector, when the EPA isn’t doing their job, a whole mass of community organizations and environmental organizations would rise up and have protests and so on. But this isn’t the case when it comes to the DOJ or these kinds of prosecutions. You know, we had Occupy for a moment, we had Occupy for a moment, but that has disappeared. Is there any organizations that are playing a watchdog role?

BLACK: There are organizations like Better Markets that are certainly supportive of it, but no, there is no significant entity that has made this their issue. Nor [is] any member of Congress currently making this their issue. So we continue to hope that Senator Elizabeth Warren will make this one of her major issues.

PERIES: Alright. Thank you so much for joining us, Bill.

BLACK: Thank you.

PERIES: And thank you for joining us on The Real News Network.

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